Earnings Season Is Here!

Stocks opened lower again this morning, and the S&P 500 is down about 2.5% so far this month. The Dow is off by about 4.7%. Momentum is clearly fading after an incredibly strong run since Halloween. Kevin Simpson, founder of Capital Wealth Planning, said on CNBC this morning that “you don’t get periods like this without a pullback, without some exhaustion.” But while we’re due for a correction, the broader bull market is still intact.

Earnings season kicked off this morning with JP Morgan (JPM), Wells Fargo (WFC) and Blackrock (BLK). JP Morgan reported good first quarter results, yet the stock is down 5% this morning. Revenue rose 8% from the year-ago quarter and earnings-per-share rose 13%. Investment banking and securities trading were stronger than expected. However, expenses also increased by 13% on higher compensation costs and FDIC insurance payments. In addition, investors reacted negatively to what CEO Jamie Dimon said about net interest income, which is the difference between lending and deposit rates. NII is an important measure of profitability for banks, and it came in a bit lower than analysts anticipated. Mr. Dimon noted some deposit margin compression.

Despite these negatives, today’s market reaction seems overdone. Yes, net interest income is fading a bit; Wells Fargo (WFC) said the same thing. Also, credit costs and compensation are rising. But let’s not forget that these metrics have been at historically strong levels, and some normalization should be expected. For example, JPM’s first quarter 2024 net interest income was $23bil vs. $12.5bil in 2019 before the pandemic. And even though that figure was $1bil lower than the prior quarter, it still represents an 11% gain from a year ago. It seems like investor sentiment on the banks is just too negative.

Blackrock is down 2% this morning after reporting strong first quarter results. Revenue rose 11% and earnings surged 24% from a year ago. Both metrics beat Wall Street analysts’ consensus forecast. New client deposits to long-term investment funds rose by $76bil, and the company now manages a total of $10.5tri in assets. Nevertheless, a Citigroup analyst called the report “mixed” and said inflows were weaker than expected.

Here again, we can’t trust the initial market reaction because at the moment traders are painting every stock with the same correction brush. All they want to talk about is inflation risk and geopolitical risk. Traders are myopic, caught up in the fears of today. But investors are looking for buying opportunities because the longer-term picture is still bright.